Friday, November 16, 2007

INTERVIEW-Romania's tight monetary stance not enough

By Marius Zaharia and Radu Marinas

BUCHAREST, Nov 16 (Reuters) - The tight monetary policy stance of Romania's central bank has gone nearly as far as it can to safeguard the economy and needs support from government policies, a non-executive board member said on Friday.

The bank hiked its benchmark rate by 50 basis points to 7.5 percent last month, reversing some of the monetary easing earlier this year after inflation jumped to 6.8 percent in October, sharply above the year-end 3-5 percent goal.

"If you ask me ... I can confirm a sort of concern that we are somewhere close to a limit. The only instruments we can use are the interest rate and open market operations," Napoleon Pop told Reuters in an interview.

"Yes, if you stress it (the rate) too much, the exchange rate appreciates and the impact is this (accelerating hard currency lending)," he said.

Asked if the last board's vote was tight, he said: "Everybody eventually acknowledged the need for a hike ... some analysts said the step could have been bigger, but 1 percent (100 bp) would have put too strong a brake on the economy."

Pop said support from the government was needed for the bank to reach its 2008 inflation goal of 2.8-4.8 percent (corrects), after policymakers said this year's target would be missed, mainly due to drought-related shocks on food prices. "We've reached that limit when an active mix of policies in which one side takes into account the risks of the other side is needed ... the 2008 budget is a challenge, the biggest concern is staff expenses," Pop said.

The government budget recorded a surplus of 0.3 percent in the first 10 months of the year but market watchers fear heavy spending in the last part of the year will fuel inflation.

The finance ministry targets a deficit of 2.7 percent of gross domestic product in 2008, an election year which observers expect will put pressure on the government to boost social spending.

Pop said the government needed to draft reforms to restructure a fragmented farming sector to soften the impact of weather on food prices in the future.

"We invite those responsible to look more carefully at restructuring this sector ... farming remains vulnerable, as property is not concentrated, high-production farms don't prevail and there is no proper insurance system."

He agreed with recent comments from International Monetary Fund that inflation could be brought down to 5 percent in the second half of 2008, but did not want to comment on whether a rate hike would be needed early next year to accomplish this.

He also said the euro zone entry goal for 2014 would not be hurt by the inflation blip in the last months.

"The disinflation process in the medium and long term remains in the trend, the situation remains manageable. As for euro adoption I can say we are on schedule," Pop said.

He said the external deficit, a key economic headache for Romania, would not exceed 14 percent of GDP this year but he expected it to remain high for another two or three years. (Editing by Mike Peacock)

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